A recent dialog on the Market Direction Model

Published : October 3 2010 at 7:57 ET

Q: Is your Market Direction Model (MDM) stop-and-reverse, or are there stops? Thinking about subscribing, but want to know if you tell MDM subscribers when to SELL as well as when to buy these leveraged ETFs. Also, do you have stop-loss/trailing stop levels, or is the model in the market at all times, i.e., Stop and Reverse?

A: Yes, we keep all members updated via emails sent out in real-time whenever the model has a change in signal. Thus were the model to switch signals from buy to sell, all members would know immediately, so could take action.

The model has a fail-safe built in to avoid big losses after a change in signal, in case the signal is false. Some members prefer to go all in on each change in signal, while others pyramid in piecemeal as the market continues to trend. Certainly, if the market started to downtrend, trailing stops should be used to protect profits, just as they would be used with stocks. And odds are high the timing model would also switch signals to a sell near the start of a downtrend, but trailing stops would guarantee protection of profits.

Follow up question:

Thanks for the response - I'd like to try to nail it down a bit farther. The model has Buy and Sell (Short, as I think of it) signals. But I notice in the history on the site that there were periods where the model was in Cash - so - was it in cash because of the model's failsafe, or is there, for example, a "Sell" signal (independent of the "Short" signal) that would terminate a long position (and likewise for covering Shorts)?

This is a long-winded way of asking if you provide ALL signals a trader would need (if trading the leveraged ETFs you suggest, for example). In other words, does the model (with its failsafe) remove all discretion from trading these ETFs? That would be great, if so - if not, I need to understand where I would need to make decisions that it (i.e., this part of your service) leave up to the subscriber.

A: The model was in cash usually because of the model's failsafe, but there were times when it sat in cash as a safety mechanism due to unusually high volatility in both directions in the market, which can create false signals with larger maximum losses.

The model does provide ALL the signals a trader would need. In other words, it would never let a position run so far against itself without a failsafe kicking in. However, if, say, it's up big over a number of weeks on a buy signal, it could, in theory, give back all of those gains without any failsafe kicking in. In practice, this has never happened, because as a market starts to trend lower, the model has always signaled a sell, but IN THEORY, this possibility could occur. Capital preservation of principle is the model's overarching premise, but preservation of profits is not. Thus each investor should have their own trailing stops on a winning position, though in practice, this has not been necessary as the model will issue a neutral or sell signal well before profits on the trade vanish.